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Dear Catey,
I currently have about $315,000 in retirement savings and am 38 years old. I have about $30,000 in consumer debt (this is the only debt we carry, no car payment or mortgage) — about $24,000 of which is an unsecured loan that I’m paying about 10% interest on; the rest is on credit cards that are on a 0% promotional period and that I hopefully pay off before the 0% period expires in October 2020.
I’m trying to pay down my debt and continue to save aggressively for retirement…I’ve made minimal improvements over the past couple of years paying down my debt and continue to play the balance transfer game on credit cards to retain 0% interest rates or other low rate options. We also have two small children that add to the list of expenses.
My plan for 2020 is to lower my 401(k) contributions from 15% to 5% and use the additional income to pay down debt. My company contributes 10% no matter what I contribute. What are your thoughts on this?
Best,
M.F.
Dear M.F.,
Your issue is a common one: The average personal debt load (that’s debt excluding mortgages) of people with debt is about $38,000, according to research from Northwestern Mutual. And many of them, like you, are struggling to pay this debt down while also trying to save for retirement. So I asked financial experts: Should you cut retirement contributions to pay down debt?
The answer: “This person has a fairly decent plan: lowering the 401(k) contributions to pay down debt,” says Mitchell Hockenbury, a financial planner at 1440 Financial Partners in Kansas City, Mo. . “He is still contributing 15% (10% employer, 5% employee) toward retirement with a long runway being only 38 years old.”
Frankly, you might even be able to contribute less to retirement if that meant you could pay down debt faster: “Saving money for retirement is incredibly important, but between your savings to date and your company’s 10% contribution (which is amazing — kudos to them), your retirement fund should continue to grow steadily — even if you take a pause from saving altogether and drop your contribution rate down to 0%,” says Amy Ouellette, director of retirement services at Betterment for Business — adding that’s true only “as long as you’re truly ready to be focused on paying down your debt as rapidly as possible.”
Why is paying down debt so beneficial to you? “Getting rid of debt is one of the most profitable things you can do for your bottom line in terms of net improvement,” says Kimberly Foss, founder of Empyrion Wealth Management in Rosedale, Calif. “When you pay off a 10% loan, you are in effect boosting your net worth at a 10% annual rate.”
In general, many financial experts recommend that people with high-interest debt pay that down as quickly as possible, while also putting in at least up to what your company matches in your 401(k).
Of course, it’s essential that you do use the money you are redirecting from your retirement fund to pay down that debt quickly. “If you can’t get a grasp on your monthly spending it may be a temporary fix,” says Hockenbury. “Establish a realistic spending plan and provide yourself some leeway for the unexpected expenses of your two small children. Dedicate yourself to the spending plan and then work the math on the debt reduction plan.”
Also, look for money in other spots too, or ways to bring in any additional income — both of which can help you more quickly pay down debt.
Once that debt is paid off, and you’ve gotten your spending down through budgeting, you’ll likely feel relief: “When you’ve eliminated your debt, you’ll be in an even stronger position to resume higher contributions to your retirement plan—without the drag of making interest payments to a credit card company or other lender. At your age, you’ll still have lots of years to make up the difference for the decreased deposits to your retirement account,” says Foss.
*Letters are edited for clarity and length
